Research & Writing

Big Changes to Claiming Strategies for Social Security Benefits

On November 2, the "Bipartisan Budget Act of 2015" became law, bringing with it significant changes to Social Security that will affect retirement income planning for married couples when one or both spouses have not yet filed for benefits.

The law ends two popular strategies, the “File and Suspend” and the “Restricted Application”. For those already claiming social security benefits, there is no impact. For those who have not yet claimed, a rethink of retirement income planning may be in order. Below is a brief summary of important points.

File & Suspend: Going away April 29, 2016

Previously, a spouse could file for social security on reaching Full Retirement Age ("FRA"-- typically age 66) but suspend collecting any benefit. When Spouse 1 filed, this permitted Spouse 2 to file for a spousal benefit, typically 50% of the benefit derived under Spouse 1's earning history. Spouse 1's suspended benefit would continue to grow at 8% per year until they collected the now larger benefit at 70.

A popular strategy based using the file and suspend has been to have higher earning Spouse 1 file and suspend at age 66, and Spouse 2 claim a spousal benefit at age 62 or 66. Spouse 1's benefit grew 8% per year by delaying until they start to receive it at age 70. On the death of either of the couple, the survivor keeps the larger benefit of Spouse 1. In this way, the couple receives some income from social security sooner, the lifetime benefits of the program were maximized, and the survivor received the larger benefit for their lifetime.

Under the new rules, individuals not able to file and suspend before the April 29, 2016, deadline will face a different system. Most significantly, your spouse and dependents will not be able to collect any benefits from your earnings history unless you are currently collecting your benefit. In other words, if in our example Spouse 1 waits until age 70 to collect, Spouse 2 also is unable to collect a spousal benefit until Spouse 1 reaches age 70. A spouse can still collect under their own earnings history at any time after age 62.

Individuals who will reach FRA and file on or before April 29, 2016, can still take advantage of the file and suspend strategy.

Restricted Application: No longer available for those born after January 1, 1954

The restricted application is the “Have some income now, have more income later” strategy. If Spouse 1 filed for social security at FRA, when Spouse 2 reached FRA they could file for a spousal benefit based on Spouse 1's earnings under a ‘restricted application.’ While they collected their spousal benefit, Spouse 2's benefit based on their own earnings history would grow at 8% annually until they reach age 70, at which point they would switch from the spousal benefit to their own, now much larger benefit.

This strategy allowed couples to maximize retirement income while getting some immediate income. For high earning couples, the impact is dramatic. By using the restricted application, they could start receiving Spouse 2's spousal benefit (under a restricted application) to collect about $15,000 per year, and when both spouses claimed their own benefits at age 70 increase their combined benefits to about $80,000 annually.

For spouses currently age 62, this strategy will remain an option if the older spouse was eligible to file and suspend or is already collecting benefits. Unfortunately for those under age 62, it has been eliminated. Going forward, filing for one benefit is deemed to be filing for all benefits and collecting only the largest one, spousal or your own.

Impact on Retirement Income Planning

For couples who have already filed or who will file before the new rule's deadlines, they are fortunate to not be affected.

Couples who haven't filed and will reach FRA before April 29, 2016, should reassess their plans and see whether filing sooner is worthwhile. There's no downside to filing and suspending after reaching FRA. Also, individuals born on or before January 1, 1954, can still include a restricted application in their planning.

Unfortunately for couples who are too young to take advantage of these strategies before the deadlines, there will be no way to use them going forward. For most couples this will affect decisions on whether to delay taking benefits for the higher earning spouse until age 70, since this means there can be no spousal benefits until age 70, either. This requires an analysis of income needs, retirement dates, potential social security benefits, and life expectancies.

This thought piece does not cover all aspects of the new rules. For example, dependent benefits are also changing, and the ability to claim 'back pay' if you change your mind after filing and suspending has been eliminated.

We will be working with our clients to revise retirement income strategies as necessary over the coming months. This area is very complicated, and we welcome your questions. If you know others who may benefit from more advanced benefit claiming strategies, we would be happy to talk with them.

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